Gift splitting can help you and your spouse maximize the amount of wealth that can be transferred tax-free and is a valuable estate planning strategy. But in other circumstances, it might have unfavorable effects, so before splitting gifts, be sure you’re aware of the ramifications.

Gifts of separate property

Suppose you want to reduce taxes on gifts of separate property. In that case, gift splitting can help (as opposed to jointly owned or marital property). For example, if you gift your child $32,000 worth of separate property—say, stock—in 2022. Half of the sum is exempt from gift taxes in 2022 because of your yearly gift tax exclusion, but the remaining $16,000 is subject to taxes. However, let’s say you and your spouse decide to divide gifts. Then, half of the gift is technically from your spouse and is exempt from taxation under their 2022 exception.

It’s important to understand that when you make an election to split gifts on a gift tax return, it applies to all gifts made by you or your spouse during the year. Another option is to use your federal gift and estate tax exemption amount, which is $12.06 million in 2022. This option could occasionally have unanticipated implications.

Splitting gifts now

Many people are making large gifts to their loved ones before the current exemption expires. That is because the exemption will return to an inflation-adjusted $5 million in 2026. However, you risk losing the advantage of the higher exemption if you choose to split gifts.

For example, suppose you give your children ownership shares in your separately owned company, valued at $12.06 million, in 2022. If you and your spouse decide to divide your presents this year, each of you will have given $6.03 million in gifts. Suppose the inflation-adjusted amount is $6.03 million when the exemption amount decreases in 2026. As a result, you and your spouse will have exhausted your exemptions. However, if you had not divided gifts in 2022, you would have been able to keep your spouse’s $6.03 million exemption. Meanwhile, you are also taking advantage of your $12.06 million exemption.

Follow the rules

To avoid unwanted — and possibly expensive — outcomes, it is crucial to be aware of the gift-splitting regulations. Please contact our RRBB accountants and advisors for additional details and to answer any questions regarding making gifts.

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